Marcial: Wal-Mart Rolls Ahead

Despite sharp gains, the retailing giant's shares are a bargain, analysts say, as booming sales overseas power growth

Here's a pleasant surprise for Wal-Mart (WMT) investors: The world's largest retailer is one of this year's few big stock market winners. Even as the Standard & Poor's 500-stock index has fallen by some 12% this year, Wal-Mart has piled up an impressive gain of 25%, to 59 a share— close to its 52-week high of 61. For several years— from 2005 to early 2007—Wal-Mart's stock had dawdled within a narrow range in the 40s and 50s.

The big question now: Is Wal-Mart still a bargain after its sharp ascent? You can bet on it. Most of the 27 Wall Street analysts who track Wal-Mart believe so, too. Of that group, 19 recommend buying the stock, and have price targets ranging from 65 to 75 a share.

Behind the stock's strong showing is the giant discounter's own sterling performance at a time when many retailing chains are posting losses due to a slowdown in consumer spending. Although inflation is continuing to crimp shoppers' spending capacity, Wal-Mart's sales keep rising, in part because consumers more than ever are opting for low-priced goods.

"Improving near-term fundamentals, combined with management's adoption of a more disciplined approach to U.S. store growth and capital expenditure investment, should work to drive higher returns on capital and valuation on Wal-Mart shares longer term," says Peter Benedict, a senior analyst at Wachovia Securities (WB) (it has done business for Wal-Mart).

Overseas Sales Booming

One big driver of the chain's growth is its huge advance internationally, where sales have boomed 16.9%, to $25.3 billion, in the second quarter, 8.5% increase in U.S. sales, to $64.1 billion. (Wal-Mart had total revenues in 2007 of $345 billion.) Critics worry about where the retailer's growth will come from in the years ahead. But the retailer's big push into foreign markets, especially in China, has just begun, says one corporate insider.

The company has so far opened 207 stores in China, including 101 TrustMart outlets that are 35% owned by Wal-Mart. And the number of stores on the mainland is tiny compared with the total in other countries such as Mexico, where there are more than 1,000. There are 394 stores in Japan, 352 in Britain, 313 in Brazil, 305 in Canada, and 475 in all of Central America. And sales overseas are expected to continue grabbing a bigger piece of the pie.

David R. Cohen of independent investment research firm Value Line (VALU) predicts Wal-Mart's international division is slated to expand at a faster pace than domestic operations over the next three to five years. He gives the stock the highest ranking (No.1) in Value Line's "timeliness" category. He notes that Wal-Mart has made numerous acquisitions in South America and Asia in recent years, and expects those to continue for some time. The company's selling space overseas jumped 18% last year, says Cohen, vs. a 12% rise in the U.S. Its earnings are being bolstered, he adds, by the company's stock repurchase program. which jumped from $1.7 billion in fiscal 2006 to $7.7 billion last year.

Cohen figures Wal-Mart will earn $3.50 a share in the fiscal year ending Jan. 31, 2009, on sales of $412 billion, and $3.85 on sales of $445 billion in fiscal 2010.

One-Stop Shopping in Lean Times

Gregory Melich, an analyst at Morgan Stanley (MS), who rates Wal-Mart overweight, says his bullish-case scenario assumes further potential upside in the stock to 75 as improved cash-flow management, which is part of the "micro story" in the stock, should help push Wal-Mart's stock price higher. "The market is not fully valuing Wal-Mart's turnaround in its net return on operating assets," says Melich. (Morgan Stanley has done banking for Wal-Mart and owns shares.)

The bottom line: Wal-Mart's claim to being the largest discount store around has been paying off, especially now when the price of gasoline remains high and the economic backdrop has dimmed. Joseph Agnese, an equity analyst at Standard & Poor's who rates Wal-Mart a buy, believes the company "is well positioned to gain market share in an adverse economic environment, as we think consumers have traded down from higher-cost competitors and taken advantage of [Wal-Mart's] one-stop shopping convenience." (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)

If there's one thing that people across the globe love, it's a bargain. And with Wal-Mart becoming a fixture of the retailing landscape from Boston to Brasilia to Beijing, investors may want to find a place for it in their portfolios.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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